A test of competition in Chinese banking

Abstract

We apply the Bresnahan–Lau model (1982) to test the degree of competition of China’s banking industry over the period 1986 to 2011. Results strongly reject monopoly power and indicate perfectly competitive behaviour. China’s entry into the WTO did not cause any measurable shift in banking competition.

Keywords:

• competition
• Chinese banking
• Bresnahan–Lau model
• Panzar–Rosse model

JEL Classification:

• G21
• L10

Acknowledgements

We would like to thank Sasha Skiba and Cristian Rojas Ulloa for their helpful comments.

Funding

We acknowledge financial support from the Department of Economics and Finance at University of Wyoming.

Notes

¹ This specification satisfies the conditions shown by Lau (1982) as necessary and sufficient to identify λ.

² Data are drawn from two sources: the BankScope database and the Almanac of China’s Banking and Finance. Since BankScope does not provide information over the period 1986 to 1991, those data are taken from the Almanac of China’s Banking and Finance. GDP data are collected from China’s Statistic Year Book 2011. Data are available upon request from the authors. Our sample size (26 observations) is comparable to several other studies of bank competition: Shaffer (1993) applied the same model to a sample of 25 observations on Canadian banking, and Alexander (1988) used a sample of 22 observations.

³ As the Chinese government does not report a deflator, the authors constructed a deflator series from annual real GDP growth rates, using 1986 as the base year.

⁴ This total does not include the China Development bank, Agricultural Development Bank of China and Export-Import Bank of China, which are policy banks.